Saturday, December 16, 2017

KRUGMAN: Bitcoin is a More Obvious Bubble than Housing Was

Paul Krugman says the price of bitcoin is helped by the fact that no one understands it and people are caught up in the mystique of this new technology. Below is a transcript of an interview on the topic conducted by Business Insider. I would say that Krugman has a decent understanding of what is going on with Bitcoin but not perfect.

Josh Barro: Finally, I want to ask you about Bitcoin. Does the runup in bitcoin prices make any sense to you?

Paul Krugman: No.

Barro: What's going on here?

Krugman: Bitcoin, nobody understands it. Which is for the time being a positive. It comes with this —

Barro: A positive for the prices?

Krugman: For the price of it. It's got this mystique about it, because it's some fancy technological thing that

nobody really understands. There's been no demonstration yet that it actually is helpful in conducting economic transactions. There's no anchor for its value. You know, unlike pieces of paper with dead presidents on them, those are anchored by the fact that you can use them to pay taxes. There's not anchor for bitcoin. But bitcoin has developed this mystique. The price is going up, partly, it's tied up with Libertarian stuff ... I'm told that there are apocalyptic, the-end-is-coming guys who are accumulating bitcoin because once we turn into a Mad Max wasteland, having a digitally distributed – nevermind. So … I think it really doesn't make a whole lot of sense. And the psychology of it is clearly — if you're using the shoeshine boy test, my barber asked me about bitcoin. The feeling that people are caught up in something that they really don't understand, is overwhelming.

Barro: So you think this is an obvious bubble?

Krugman: It's the most — if this isn't … this is even more obvious, I think, than the housing bubble was. And that one was, I thought, tremendously obvious.

Barro: So sometimes a bubble can be obvious and yet can persist for a long time. And in fact you can – I mean, you know, I've been saying that Canadian housing is in a bubble for years, and it keeps going up. And so, I mean, the nice thing about calling a bubble is that you can always — if it doesn't burst, you can always say well it's just going to burst later. But I guess the question is how long can something like this go on with bitcoin?

Krugman: Well, the thing about bitcoin is there isn't actually a whole lot of stuff… there's not — in a way the fact that it's completely untethered to anything real means that it doesn't fall until it … it can just hang there in mid-air for a long, long time. There's no obvious real — it's not like, you know, the housing crisis. If housing prices are unrealistic, then more housing gets built and you can see it. Bitcoin — the cost of producing of new bitcoins has gone crazily high. So that's not going to happen. So we're waiting for a Wylie Coyote moment. You know, the cartoon physics, he runs off the edge of a cliff and it's only when he looks down and realizes there's nothing under him and he goes ... So we're waiting for that sort of thing to happen. And that can go on for a long time. You know, a bubble is a natural Ponzi scheme, that's how Bob Shiller puts it. That it's — as long as it's going on everybody who bought in keeps making money and it looks good, and the fact that in the end somebody's going to be left holding the bag. Everybody assumes it's not going to be them.

Once we turn into a Mad Max wasteland, there will be no grid and therefore no ability to use the internet, and therefore bitcoin would vaporize.

It is all quite silly if one rules out principal uses:a) money launderingb) buying illegal drugs or similar illegal transactionc) money removal from a State like China d) some say escaping Venezuela like currency devaluation though goldand the stock market would be a much better / liquid purchase

In my view, the driver of the price is the belief of late investors that they can reap the same returns of early investors. So they do not have any intent on making a quick 10% profit and getting out. Instead, they are holding, hoping for a 1000% return, or more. Of course, once the big early investors decide it's time to cash out, the bitcoin market will come crashing to the ground. This kind of reminds me of the old adage, "you can't cheat an honest man."

My favorite nonsense comment is "bitcoin is not a bubble, it's different because it's money."

That comment comes from those who should have a better grasp of history.

Never thought I'd agree (mostly) with Krugman, but I do here. But I don't think the anchor for green paper with Presidents' pictures on them, is being able to pay taxes; I don't think those pieces of paper have any anchor. But I'm quibbling...